Smart contracts are automated protocols that can function without any external involvement or oversight. NFTs, the most significant trend in the crypto space, functions thanks to smart contracts. NFT smart contracts help propel the industry further.
A smart contract exists as code on the blockchain. The inherent nature of blockchain makes any smart contract immutable and irreversible. Ethereum helped popularize the feature, and since then, smart contracts have become an essential part of the blockchain world.
One of the more significant benefits that blockchain technology provides is automating tasks. Typically, completing these tasks requires third-party involvement. Think of it like a person waiting for a bank to approve a transfer. Blockchain technology operates without any external involvement and automatically completes the process. This automation occurs thanks to using smart contracts. Anyone can program the smart contract to execute under specified conditions and the smart contract automatically initiates the required protocols.
Another example highlighting the benefits of blockchain is a debate between a regulatory group and the citizens the group represents. The two parties can agree on a blockchain system and put the law into place through a smart contract. Additionally, the two involved parties can read about the law on a decentralized app or learn through the blockchain.
History of smart contracts
Smart contracts existed before blockchain technology. Ethereum may have popularized the concept in 2014, but Nick Szabo introduced the idea back in the 1990s. During that decade, Szabo considered the idea of a digital currency called Bit Gold. The currency never reached fruition, but it highlighted a critical use case of smart contracts- a trustless transaction between users on the internet. Consider how Web 1.0 is the internet and Web 2.0 is the presence of centralized platforms. Then, Web 3.0 is the automated, user-powered, trustless version of the digital space.
Ethereum and many other sites in the industry liken smart contracts to a vending machine. A typical vending machine serves the purpose of a vendor giving the user a product. The device operates without a person taking the money and handing the item to the buyer. Smart contracts achieve that purpose but showcase greater versatility.
Over the years, the concept of smart contracts underwent several changes and improvements. They first began life as an ‘if-then programming statement a developer can create and implement. Developers have made it so that anyone can create a smart contract. Even people with minimal coding knowledge can create a smart contract. These developments increase the service’s security with various programming languages, develop alternatives like secret contracts, and store smart contract history.
The developers aim to store the history and present it in an understandable way for everyone. This process is significantly easier than trying to read a smart contract on the blockchain.
The working process of smart contracts
The basis of a smart contract is that once you set the requirements, it will automatically execute the protocols. For example, a programmer can create a smart contract agreement that activates under specific conditions. The smart contract executes the agreement when the specific needs are met.
For example, imagine a store asking a farmer for one hundred carrots. The store locks the funds into a smart contract and activates when the latter meets the requirements. The farmer delivers the required amount to the store, and the smart contract releases the funds. Conversely, the smart contract can cancel and return the funds to the store if the farmer misses the due date.
This example is a simple use case but demonstrates the operations of a smart contract. Of course, you can use this technology to work for a large audience, replace government mandates and retail systems. Additionally, smart contracts could remove the requirement of bringing specific disagreements to court. This benefit could save both sides a significant amount of money and time.
Another significant benefit smart contract provides is their security. In the Ethereum ,smart contracts are written using the Solidity programming language. The language ensures that the limits and rules of the smart contract remain part of the network and no one can change that. Additionally, these limitations can hamper any scams or contract alterations. The smart contract only executes its functions when every party involved agrees and signs on the matter. After that, the program runs, and the contract is set for life.
Technically speaking, a smart contract comprises several steps or procedures. First, a smart contract requires the involvement of two or more sides. The two parties can agree on specific conditions to execute the contract. These conditions are written into the agreement, which is then encrypted and stored in the blockchain.
Successfully executing the contract means the transactions become a record on the network. Then, every node in the blockchain updates its copy with this transaction. This process updates the new state of the blockchain.
Uses cases of smart contracts
There are several potentially game-changing use cases of smart contracts. Using the technology in these areas can automate several processes and make it a more accessible place to live. Listed below are some of the notable examples of smart contract use cases.
Companies profit on the internet by knowing everyone’s interests. Many people do not control how companies get data about them and how businesses benefit from that information. However, smart contracts give back control to the people.
A world that fully embraces blockchain technology will be one where identities are tokenized. Ideally, this means that everyone’s identity exists on a blockchain and remains safe. Here, users looking to register on social media or apply for a bank loan can complete the process while retaining control of their identity.
Today’s world relies on real estate agents and brokers. The process of selling a house requires the intervention of a broker to handle the paperwork and find a buyer. Though the seller no longer has to tackle the complexities of selling a home, the agent takes a hefty fee off the house’s selling price.
Here, a smart contract can replace the broker and streamline the process. Imagine a house owner tokenizes their house deed on the Ethereum blockchain. The owner wants to sell it and creates a smart contract with the buyer. The agreement holds the deed in escrow till the buyer transfers the required funds. Successfully moving the funds means the contract executes and the act passes to the buyer.
Insurance policies are another area that benefits from smart contract implementation. Signing up for a policy enters the user into a smart contract with the provider. Every policy requirement remains a part of the smart contract. The user can read the conditions and sign them if they agree.
That contract can remain open till the party requires it. When needed, the user can upload the necessary forms and indicate the need for the payment. The agreement approves the documents and releases the funds. This use case of smart contracts removes the requirement of interacting with insurance groups and agents. The user may need paperwork to prove their requirements, but the funding process and submission can instantly occur.
Perhaps the most significant potential use case for smart contracts is the supply chain industry.
Farmers, office warehouses, and grocery stores have a specific role in the supply chain. However, the increasing complexity of these networks makes it hard for businesses to track the product and follow payments. Smart contracts here can automate and incentivize every aspect of the network and increase accountability.
Imagine a grocery story waiting on a supply of oranges from another continent. The store paid for a specified amount of fruit and expected exactly that amount upon delivery. Here, human error can come into effect, and workers can misplace some fruit, lose them in transit or steal them during delivery. The existence of human error makes it near impossible to track the shipment and find out where the mistake took place.
Smart contracts can overcome this issue. Here, the store can create an automated check-in at every step of the process. Those processes do exist in a regular supply chain and require manual input. A person can lie and take the product during transit then claim it was lost along the way.
The store can create a contract that does not release the payment until every orange is accounted for. This process makes it impossible to mislead or alter the system. It also ensures that every party involved remains attentive during the supply. Additionally, releasing the payment after successful completion is an excellent incentive in its own way.
The store can further the process and find which supplier does not fulfill the smart contracts and choose not to work with them. This process can lead to a rating network where clients know who to work with and who not to. Such a system can save everyone time and money in the long run.
The utilization of smart contracts makes it easier for online users to execute ‘trustless’ transactions. These protocols provide security and accountability without relying on external involvement. The potential for implementing smart contracts into various industries is an exciting one. Imagine removing the lack of trust that users typically experience when transacting with others. This benefit is precisely what a smart contract can do.